The Home Buying Process
STEP ONE: Is Owning a Home Right for You?
There are many factors to consider when contemplating homeownership. While there are benefits and drawbacks to owning a home, you have to decide what is best for you. Homeowners experience the freedom of having a place of their own and the benefit of an investment where the equity potentially increases each year. Historically, homes have appreciated in value, making them worth more than when they were purchased. Additionally, there are significant tax benefits to owning a home and paying mortgage interest.
Homeownership also means you are responsible for all maintenance and repairs. In addition to paying the mortgage every month, there are other expenses to keep in mind: homeowner’s insurance, property taxes, condominium fees and utilities. In the event you wish to move, selling a home is more difficult and more time consuming than giving notice to a landlord.
STEP TWO: Assess Your Finances
How Much Can You Afford? Once you have decided to become a homeowner, you should review your finances and determine how much you can afford per month. Begin by analyzing your current monthly expenses. It may be necessary to cut back on some areas of spending in order to afford a mortgage payment and the other costs of owning a home.
Most mortgage loan programs require that monthly housing expenses do not exceed 28% of your gross monthly income. The amount of housing expenses plus any other monthly payments on installment debt (e.g. credit cards, car loans) should not exceed 36% of your gross monthly income. Depending on the loan and insurance type, the ratios may be as high as 33%/41%.
Check Your Credit Report
When applying for a mortgage, a lender will look at how much you can afford to pay and your credit history to determine if you qualify for a loan. Consumers should check their credit report for discrepancies before going to a lender. Obtaining a copy of your credit report is simple and consumers living in
Equifax 1-800-685-1111 www.equifax.com
Experian 1-888-397-3742 www.experian.com
Trans Union 1-800-888-4213 www.transunion.com
The report will detail your credit history, including credit cards, loans and any court judgments or collection notices. When you receive the report, verify that all the information is correct. If you find a discrepancy, write a letter to the credit bureau to correct the entry.
Once you have determined how much you can spend each month on your new home, you can determine the maximum sales price you can afford. The maximum sales price you can afford will vary depending on your income and the size of your down payment. A mortgage pre-qualification will give you an estimate of the amount of money you can borrow to purchase a home.
Most lenders can issue a pre-qualification letter to a prospective home buyer. You will need to provide the lender with information on your income, assets and debts. There is no fee for pre-qualification, and you are not committed to obtaining a loan at this time.
A mortgage pre-approval is not the same as pre-qualification. A pre-approval means you have completed the application process and have a written commitment from the lender to give you a mortgage loan for a certain amount.
Pre-approval gives you an advantage when dealing with a seller since you already have financing in place. Typically, the home remains under contract while the buyer obtains financing. The seller will be able to complete the transaction sooner to a pre-approved buyer.
The disadvantages of pre-approval are that you must pay the application fee and complete the necessary forms verifying your employment, income and credit. If you later decide not to use the lender who issued the pre-approval, you will may lose the application fee and have to go through the process again.